GDP up modestly on stimulus and jobless claims jump
WASHINGTON (Reuters) - An emergency dose of government stimulus helped the U.S. economy grow at a 1.9 percent annual rate in the second quarter, a soft pace but enough to take it off a path perilously close to recession.
Revised data from the Commerce Department released with the second-quarter figures on Thursday showed the economy shrank in the final quarter of 2007, the first decline in six years, before barely edging up at the start of this year.
The stock market plunged as the disappointing data revived fears of a recession.
"With the boost from tax rebates now fading, lower interest rates having little positive impact and signs emerging that overseas demand is weakening, we expect the economy to contract outright in the second half of this year," said Paul Ashworth, senior U.S. economist for Capital Economics of London.
As the countdown to the November 4 U.S. presidential election continues, Bush administration officials, meanwhile, insisted the economy could keep growing and dismissed calls from prominent Democrats for a second economic stimulus program, saying it was not warranted by recent economic reports.
"I think the politicians are much more concerned about the polls than the economic data," White House budget chief Jim Nussle told CNBC television. President George W. Bush said at a coal producers meeting he considered the economy on a sound footing.
"Exports are on the rise. Durable goods orders are strong. That suggests that businesses are anticipating a better second half of the year," Bush said.
The Bush administration issued of billions of dollar in tax rebate checks in the second quarter as part of a stimulus package designed to stoke the economy.
RECESSION IN THE WIND
The second-quarter gain in gross domestic product was slightly weaker than economists had expected. In addition, the department revised down its GDP measures for both the first quarter of this year and the fourth quarter of 2007.
It said the economy contracted at a 0.2 percent pace in the fourth quarter, and moved ahead at a meager 0.9 percent rate at the start of this year, just skirting the popular definition of recession, which is back-to-back quarters of declining output.
Stock prices dropped, with the Dow Jones industrial average .DJI plunging 205.67 points to end at 11,378.02.
Prices for U.S. Treasury debt securities rallied as investors sought lower-risk government bonds in preference to stocks. The yield on the benchmark 10-year Treasury note dropped to 3.95 percent, the lowest in almost two weeks and down from 4.05 percent late on Wednesday.
Adding to a sense of foreboding about the economy, new claims for jobless benefits unexpectedly jumped 44,000 last week. Though Labor Department officials said special factors were at play, the jump in claims just before a closely watched report on July employment on Friday reinforced worry about a deeper downturn if consumers retrench on spending for fear of losing their jobs.
Payrolls have declined for six straight months, and analysts expect nonfarm payrolls dropped by 75,000 jobs in July.
The GDP report showed businesses reduced inventories at the sharpest rate since the end of 2001, a possible sign they anticipate restrained growth ahead.
HOBBLED BY HOUSING
A key reading on core inflation -- personal consumption expenditures excluding food and energy -- rose at a 2.1 percent annual rate in the second quarter after gaining 2.3 percent in the first quarter. The moderation in core prices came despite a jump in overall prices of 4.2 percent from 3.6 percent in the first quarter.
Consumer spending, which fuels two-thirds of U.S. economic activity, grew at a 1.5 percent annual rate in the second quarter, up from 0.9 percent in the first quarter and 1 percent in the fourth quarter last year.
The department noted that incomes rose more sharply in the second quarter and attributed it primarily to the stimulus payments the government was issuing to qualifying consumers.
The economy continues to be hobbled by a severe downturn in the housing sector, but the drag from it was less severe in the second quarter. Spending on home building contracted at a 15.6 percent annual rate, down from rates of 25.1 percent in the first quarter and 27 percent in last year's fourth quarter.
The department issued revisions for the three years dating back to 2005 that showed growth was weaker in each year than previously thought. GDP grew 2 percent in 2007 instead of 2.2 percent, 2.8 percent in 2006 instead of 2.9 percent, and 2.9 percent in 2005 rather than 3.1 percent.
The fourth quarter of 2007 was the weakest three months since the economy shrank at a 1.4 percent rate in the third quarter of 2001, amid the last official recession.
(Additional reporting by Alister Bull; Editing by Leslie Adler)
((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net)
